Contrary to recent trends of corporations creating MLPs by spinning off midstream assets into the tax-advantaged structure, pipeline titan Richard Kinder revealed his plan to put all of his eggs into one $71 billion corporate basket.

With the transaction expected to close in the fourth quarter, the parent company would own all the currently outstanding common units of Kinder Morgan Energy Partners LP, El Paso Pipeline Partners LP and Kinder Morgan Management.

Through a series of purchases, Kinder has a 24% stake in the parent company. It’s been reported he made $1.5 billion on the initial price movement. Shares of Kinder and its affiliates were bouncing mid-morning Aug. 11. Kinder Morgan Inc. shares were trading up more than 8% at $39.06 each.

A fresh slate of questions emerged from this deal, including expectations for interest rates and whether the ability still exists for capturing a generous valuation with the MLP structure, analysts at Simmons & Co. International in Houston said in an Aug. 11 note.

One thing is certain: The move eliminates the general partner’s (GP) incentive distribution rights, which some critics had used against Kinder Morgan, suggesting the GP was taking too much profit from the MLP. It also makes Kinder Morgan, without question, the largest energy infrastructure company in North America in which more than 82% of its cash flows are fee-based.

In a slide presentation on its website, the company said it provides immediate value uplift to current MLP unitholders and gives all four entities the quality consideration to share in future growth.

The company will streamline its complicated public structure of four separate entities into simply Kinder Morgan Inc., providing “one equity holder base, one dividend policy, one debt rating, no structural subordination and no incentive distribution rights (IDRs).”

In an interview with FuelFix, Kinder said the IDRs had reached a point where the GP took a significant amount of cash flow from the MLPs. Once the deal closes, he said, “Everything will be tethered into one melting pot that’s going to produce dramatically increased dividend and a faster growth rate.”

Kinder said the benefits of operating as a corporation include a broader pool of capital, lower capital costs, a more competitive acquisition currency and income tax savings of $20 billion during the next 14 years.

“All shareholders and unitholders of the Kinder Morgan family of companies will benefit as a result of this combination,” he said in a statement. “Everyone will hold a single, publicly traded security—KMI—which will have a projected dividend of $2 in 2015, a 16% increase over the anticipated 2014 dividend of $1.72. We expect to grow the dividend by approximately 10% each year from 2015 through 2020, with excess coverage anticipated to be greater than $2 billion over that same period. This combined entity will be the largest energy infrastructure company in North America and the third largest energy company overall with an estimated enterprise value of approximately $140 billion. Additionally, we will have a leading position in each of our business segments and operate in the rapidly growing North American energy infrastructure sector.”

The $71 billion price tag breaks down in the following: $40 billion in Kinder Morgan Inc. equity; $4 billion in cash; and $27 billion in assumed debt. Management will remain the same, but the board of directors may increase with three members from the boards of the former MLP and three members from El Paso.

The proposed merger collectively represents the largest energy mergers and acquisitions transaction since the merger of Exxon and Mobil in 1999, said analysts at Jefferies, which acted as sole financial advisor to Kinder Morgan Energy Partners and Kinder Morgan Management.

Analysts early Aug. 11 were optimistic about the transaction.

“In our view, the Kinder roll-up, which should improve Kinder's prospects going forward, is a net positive for MLPs on consolidation upside,” Baird analysts said. “We see this as an elegant solution to improve Kinder’s prospects and as a positive for MLPs on consolidation upside potential.”

Looking forward, Baird wrote, there may be others looking to follow in Kinder’s footsteps.

“Energy Transfer Equity has a host of subsidiaries, which ultimately should be melded into one super-entity resembling a pro forma KMI or Enterprise Products Partners,” they said.

Kinder ripe for reorganization

After a couple of years’ worth of share price underperformance by all four of Kinder Morgan’s business entities, folks expected the pipeline giant might be working on changes, but not necessarily the one announced the evening of Aug. 10.

On Aug. 11, investors showed their approval, boosting the Kinder complex’s market value by more than $13 billion.

“A transaction was not surprising. I would say this transaction was a little surprising,” said Kenny Feng, president and CEO of Alerian, a leading MLP index. “But then, if you think about the history of the MLP space, Rich Kinder and his taking of those Enron assets and turning the MLP into a growth vehicle, as opposed to just a stable cash-flow vehicle. He was a pioneer in this space, so for him to take this particular step, creates a certain element of surprise.”

On the other hand, Feng mused, CEO Rich Kinder’s 24% stake in the corporation makes him a significant shareholder.

“He’s going to do what’s in the best interest of that particular company, and it’s been viewed as a positive by the entire marketplace,” he said.

Feng explained that Kinder Morgan had been in the “high splits”—where incentive distribution rights (IDRs) grant an MLP’s general partner 50% of its profit—longer than many MLPs have been traded on the public markets.

During the last decade, a number of MLPs have filed IPOs without using the IDR, the first being Copano Energy LLC, which, ironically, was acquired by Kinder Morgan last year, Feng noted.

“While you’ve seen a handful of other companies go that route in terms of when they went public, that really hasn’t caught on as a trend. What this suggests is the market is willing to bear, at IPO time at least, the possibility of reaching the high splits and then having to engage in some sort of transaction to compensate the general partner for removing those splits, either a reset of the IDRs themselves to some different tiered level, buying them out or eliminating a high tier,” Feng said.

“I’m surprised to some extent that the market has continued to be willing to bear this structure, given that eventually this transaction has to take place. The fact the market has allowed that to happen come IPO time, to a certain degree, just suggests that the energy renaissance continues to happen, there continues to be interest in the structure, and investors are willing to take that because the growth is still there.”

During a conference call with investors, Kinder wasn’t shy about his interest in an MLP space that’s ripe for acquisitions. More than 100 MLPs today have a combined market value of about $560 billion.

Feng noted, however, that some MLPs, like the merger between Inergy Midstream LP and Crestwood Midstream Partners LP last year, could band together to lower their own cost of capital and increase their scale.

MLPs under the microscope

As the dust begins to settle over the big news, questions of whether the MLP structure itself is doomed have emerged.

Not necessarily, the experts say.

“Given the markets end up rewarding parties for converting to corps in terms of valuation and share price, I’m sure there will be some other companies that will evaluate the idea, and you may see others follow their lead in terms of going down that path,” said Jason Spann, a partner at Deloitte Tax LLP.

“But I wouldn’t expect to see a mass shift overnight of MLPs suddenly announcing conversions to corporations. I think that may be a longer term possibility or trend, and that may be impacted driven by where interest rates go and where the interest rate environment goes as well. So it will be driven by other economic considerations.”

Fundamentally, business structures, such as the in vogue MLP, tend to be cyclical, much like the energy industry itself. And, without a major legislative change that alters the ability for entities to operate as MLPs, the structure remains a viable one, Spann said.

“It’s not that one is better or worse economically,” he explained. “I think people would say from a tax perspective, MLPs are more tax efficient. But there’s other factors outside of tax going on that are driving decisions in terms of whether they should be a C-corp or not.”

Still, fans of the MLP structure continue to get less-than-stellar news this week. Shortly after word came down that MLP pioneer Richard Kinder was absorbing his MLPs into his Kinder Morgan Inc., the U.S. Treasury Department told Reuters it is looking into the ever-increasing use of the MLP structure.

In an email to Reuters regarding the Kinder Morgan transaction, a department spokesman said the agency is “looking into the effects of these transactions on future tax revenues,” adding, “Instances where the tax base may be eroded serve as a reminder of why we need Congress to enact business tax reform that broadens the tax base and lowers tax rates.”